2020 is the year of the pandemic where the economies around the world has taken a big hit. Businesses are affected and people are losing jobs. Some of us can vividly recall back in 2003, where SARS has similarly hit our economy badly. In 2003 period, we observed that the property market was performing badly together with the economy.
However, in 2020, the property market went up while the economy went down. Singapore’s residential property market has in fact made a recovery in the middle of the worst recession. How is this even possible? I believe that behind every market movement, there must be some tangible reasons. Here are some possible reasons that I feel has caused the property market to move up.
- Affordability
For any property market to move up, it must be support by buying activities (Demand). Before any property purchase, the buyers must be able to afford to buy the property. Let us explore this by looking at the chart of the median monthly household income growth (resident household) compared to the property price index.
Source: Business Times, 10-11th Oct 2020
From the chart above, we can see that the median household income has steadily risen from 2013 to 2019. While income has increased over the years, the property price index has not increased by the same percentage. Instead, the property price index went down before it recovered to around 2013 level. Comparing to 2013, property seems to be more affordable now due to the increasing median income over the years.
In a recent report on median income, the median income here has dipped in 2020. In 2020, the median household income has dropped to $9,189. Based on TDSR calculations, most of the buyers here can still take a loan of about $950,000 (assuming 25 years loan tenure). If they have a $300k in cash and CPF funds, they still afford a $1.2M property.
This is shown true in this article, where non-permanent resident apartment purchases in 2020 accounted for just 4.1 per cent of total sales, the lowest in more than two decades.
Source: Straits Times, 27th Jan 2020
While some people are severely affected by job losses or business losses, there are also a group of people who are not affected by this pandemic. Some may be even done better in this pandemic (like the IT, logistics, supermarkets sectors etc.). We can see that the impact of this pandemic had a different impact on different industries. For those who are doing well or not affected by the pandemic, they can continue to purchase properties.
- Low interest rate
With the current low interest rate environment, it encourages borrowing as financing cost is low.
Let us illustrates this with an example below:
For a $1M dollar loan taken with 20 years tenure:
- At 1.3% interest rate: the instalment is $4,734.02.
- At 2.3% interest rate: the instalment is $5,202.14.
Comparing the instalments above with their corresponding interest rate, at 1.3% interest rate, the instalment payment lesser by $468.12 comparing to 2.3% interest rate. Thus, with lower interest rates, borrowers are more likely to afford the instalment. For those who are buying the property to rent out, the lower financing cost mean that they will be able to get a better rental yield.
A word of caution
With any recovering economy, the interest rates may be expected to go up. Of course, as the economy recovers, interest rate may increase too. If interest rates where to go up to 3.3%, the corresponding instalment will now be $5,697.35. That will be $963.33 extra from the 1.3% interest rate.
Therefore, buyers who are buying right up to their affordability level will feel the financing pressure of keeping up with the instalments when the interest rate increase. These buyers may soon be unable to afford the instalments and result in the default of the housing loan.
- Number of Upgraders
From the illustration below, we can see that from 2019 to 2022, on average there is a threefold increase in the numbers of HDB units going to MOP compared to the average 10 years before 2019.
Source: Business Times, 30th Jan 2019
So, what does this means?
When HDB flat reaches the MOP, the owners of the BTO flats owners typically have 3 choices:
- Continue staying in the HDB.
- In this case it will not affect the property demand or supply
- Sell the BTO flat and buy a resale HDB flat
- In this case, it can increase the transaction volume in the resale HDB market
- Sell the BTO flat and upgrade to a private property
- In this case, it can increase the demand for private housing and can possibly cause the prices to move up
With the record number of MOP unit over these few years, the demand from the HDB upgraders for private housing will be expected to remain strong.
How About EC upgraders?
Similarly, this situation applies for new EC owners reaching their 5 years MOP. They are presented with the similar 3 choices above. Thus, the demand from the EC owner could also increase the demand for private housing.
If you like to find out how the future numbers of EC upgraders can affect the demand, you can contact me using the form below.
- Expectation of cooling measures
With the expectation of pending cooling measures, some buyers may worry that any implementation of new cooling measures could affect their potential to buy a/or another property.
For example, previously when the LTV (loan-to-value) was adjusted from 80% to 75% of the property value, buyers will have to fork out an additional 5% to pay for the down payment. This amount will be an additional $50,000 for a $1M property purchase. In addition, after paying for the higher 25% down payment, it will mean that the buyer will now have less savings on hand, resulting in lesser buffer funds after the purchase. Buyers who are not able to fork out the addition 5% then may have to wait out on the opportunity to invest now.
The “fear of losing out” mindset may results in some buyers who are sitting on the fence today to decide to go ahead in purchasing a property now, rather than waiting for any new cooling measures to be announced and affecting their ability to invest. Just in case any announcement of the cooling measures could directly affect their ability to buy.
What Should I do now? To Buy or not to buy?
Some of us may think that with the market going up, I should rush in to buy now. While some of us may think otherwise. As the market has moved up already, I should hold back and wait for the next market crash.
So, should we base our buying decision by looking at the market price movement? Let us look back at what happened from 2017 to 2020.
| Year | % change |
| 2017 | +1.1% |
| 2018 | +7.9% |
| 2019 | +2.7% |
| 2020 | +2.2% |
Over the last 4 years, the property market price index has picked up by around 13.9%. So, does all the properties in Singapore also experience the same price increase?
Let us compare the average price movement of these two condos below (see Chart 1 below). Over the last four years (while the overall market index has moved up) one of the condos average price has moved up while the other condo average price has moved down.
Chart 1
Therefore, if we based our decision solely to buy a property based on market price movement alone, it may not be sufficient to make a good buying decision.
What should be my approach be then?
While market price movement could be one piece of information that we could rely on, however, it should not be the only piece of information for us to consider when making our purchasing decision.
Instead, we should consider other critical factors below to have an even better picture of the property market situation:
- Volume of transaction
- Comparison of the prices of property transactions in the same district
- Comparison of the prices of other condos across different district
- The potential growth of the property in the future
- What is the fair valuation of the property?
- Assessing the demand/supply situation of the property
- Potential rental demand and rental yield of the condo
By gathering all the above information, we can then form useful insights on the property we are going to purchase.
Is that all?
Let us look at another example.
During the initial launch, the price of Trellis Tower was around 900psf plus (see chart 2 below). In the years that follows, the price of Trellis Tower has dropped all the way to 300psf plus! A loss of almost 60%!
What if you will be able to foresee this coming? In fact, this mistake can easily be avoided if you understand the concept of value. Back then, I think that a property at 900psf in toa payoh is an overvalued property.
Chart 2
How about if you bought at 300plus psf in 2003 and make 290% in the years that follows? Here is where if you can understand the concept of growth, you could have made this amount.
Thus, here you can see that by combining market insights together with growth and value concepts, you should be able to identify properties with good upside potential.
What if you make a mistake by buying at 900psf? If your strategy allows you hold from 900psf to1500psf now, even if you have bought at the highest price back then, you will still be able to make a tidy profit. Thus, having a sound investment strategy is another key to a good property investment.
Moving ahead
Be it that you own HDB flat or executive condo or even a private property now, any buying or selling decision involving your property can affect your financial future. Let us not leave this important decision to chance. Before you put your cheque down for the next property or before selling your property, we do recommend that you do these items:
- a full market analysis,
- an in depth personal financial analysis of your current situation,
- knowing your life’s objective and matching it with your property purchase decision.
This is to ensure that your decision will be a well-planned and a well thought out one.
If you are curious to find out all the above can be done in a careful, detail and personalized manner, you can reach me by using the form below. Looking forward to everyone making sound investment decisions.